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What to Expect When You're Expecting a Netflix, Inc. Q2 Report

The digital video veteran is facing off against modest guidance and a tough year-over-year comparison this time.

Digital-video giant Netflix(NASDAQ:NFLX) is gearing up for a second-quarter report. The results will drop on the evening of July 18, followed by an analyst-moderated management interview to be broadcast on YouTube.

Here's what investors should expect to see in this report.

Q2 by the numbers

First, let's have a look at how Netflix's own leadership sees the quarter working out. The company takes pains to underscore that the published guidance ranges are the real deal. "The guidance we provide is our actual internal forecast at the time we report," according to recent shareholder letters.

In the second quarter, Netflix expects to add 0.5 million net new domestic subscribers. That's roughly in line with net adds in recent years, with a small haircut resulting from the expected impact of subscription prices rolling out of their two-year grandfathering periods. All in all, the number of paid domestic subscribers should end up at $46.4 million, 13% above the year-ago period. Revenue from this segment should rise 18% year over year to $1.21 billion.

The international streaming business should add approximately 2 million net subscribers, down from 2.4 million a year ago. The premiere of streaming services in Australia and New Zealand in early 2015 brought in a torrent of new subscribers, giving the company a tough comparison this time. The total count of paid overseas subscribers should stop at 34.3 million, a 58% annual increase. International revenue is seen rising 66% to $754 million.

The DVD business is still around, but has become a rarely discussed afterthought. Earnings would be negative without the red mailers, but EBITDA profits would still be in the black. Management didn't offer any guidance for this outdated business.

Operating margins will remain razor-thin, and earnings should fall from $0.06 to $0.02 per share.

Looking ahead from that platform, I expect modest third-quarter guidance from seasonal effects and the impending Rio Olympics. The company often sets the bar low when it has to compete with major sporting events that last for several weeks.

Netflix CEO Reed Hastings. Image source: Netflix.

Going beyond the numbers

Netflix rolled out streaming services across the world in January, covering nearly every available market. Two nations and one contested territory were left out for political reasons. China is the fourth and last market on Netflix's wish list, and the company is working hard to find a way into that tightly controlled -- and enormous -- territory. Management may or may not have any updates to share on that front, but investors and analysts will definitely keep their eye open for any hints of progress.

Some other markets have also proved tough to crack. In Indonesia, for example, Netflix has run into government censorship and resistance from major internet service provider Telkom Indonesia(NYSE:TLK). Partly owned by the state, Telkom goes hand in hand with the government's tough media policies. New competitors are popping up while Netflix works through these issues in the world's fourth largest nation by population, and the lessons learned here might help Netflix provide better services in other heavily regulated markets. I'm hoping for a breakthrough here too, but am not holding my breath.

Lastly, chief content officer Ted Sarandos will talk up a storm about the company's content production and licensing projects. Both are important, and the balance between them will drive the financial story for years to come. If you really want to understand Netflix, the financials can only get you so far. The real magic happens in Sarandos' corner office.

Netflix shares have traded more than 16% lower in 2016, or roughly sideways over the past 52 weeks.